Berkowitz Should Unlock St. Joe's Value

| About: St Joe (JOE)

We had a double dose of Bruce Berkowitz over the weekend.

First was a piece in the Miami Herald about Bruce and St. Joe: Berkowitz in Miami Herald (pdf)

There isn’t really anything new in the article (although it is interesting and well written) for those who have a decent understanding of Berkowitz’s past (the bookie thing is cool). One other thing, Chelsea, MA isn’t on “the other side of the tracks”... it is officially a “shit hole”. That he made it out is all the more impressive.

Here are the salient St. Joe (NYSE:JOE) related points:

St. Joe is the largest private landowner in Northwest Florida, with 576,000 acres of land, including more than 300,000 acres surrounding the new Northwest Florida Beaches International Airport, which was 20 years in the making.

With a new board and new management, the plan now is to stop the losses, cut expenses and find new revenue opportunities, Fernandez said.

“St. Joe, at its core, is an asset management company,’’ Berkowitz said. “Successful asset management companies are very profitable. There’s no reason St. Joe can’t be profitable.’’

Berkowitz and Fernandez talk excitedly about St. Joe’s prospects, citing the airport, the proximity to Eglin Air Force base, the 5.5 miles of beach along the Gulf of Mexico, two hotels and four golf courses. The company, valued at $2.5 billion, has a stock price that values its land at just $4,200 an acre. St. Joe has no debt, $125 million in cash and has an abundance of land purchased in the 1930s, and on its books at original costs of $2 to $3 an acre.

“When you think of how much land touches the Gulf, and an international airport right in the middle, and when you think of the infrastructure on the land, the bridges, highways, waterways, and the beauty of the area, it’s a very simple value equation,’’ Berkowitz said.


Berkowitz and Fernandez’s ideas for the company’s land run from mining to manufacturing, forming an economic development zone to create new jobs, garnering investment from international companies, forming strategic partnerships with other real estate development companies, and making acquisitions of adjoining land. The aim, said St. Joe director Frank, is to “take the company to the next level.’’

“Knowing Bruce,’’ Frank said, “the direction he is going is to raise some capital to inject into St Joe, and to create a new business model for it.’’

The key here is something we have been saying for a while. To look at JOE as simply a “raw land owner” IMO simply misses the boat entirely. Having that much land, located where it is, with the amazing infrastructure in place has tremendous value. Maybe not this week, month or year, but it does.

History is littered with people making fortunes on land after being called fools for even looking at it. From the Louisiana Purchase to “Sewards Folly” to the first Miami settlers who were buying “swamp land”. People even questioned the annexation and eventual statehood of Hawaii because they could not see the value “of a few islands in the Pacific” (Hawaii now has some of the world’s most expensive RE).

Pick out any vacation spot and you’ll hear stories about “it being nothing 30 years ago” and all the fortunes the early buyers of it made. I am not saying it will take that long for JOE’s value to be recognized, just that there is long term value there. It comes down to patience, vision and timing. If you are buying into RE because everyone is making money at it, you are too late (see 2006-2007). If you are buying into it because everyone hates it and thinks it is “toxic” (figuratively, literally) then your timing is at least right. Now we have to wonder if there is eventual value to the land.

Does the St. Joe’s land have value? The bear case seems to be “they haven’t made good money on it yet so they never can”, sort of a “what has been will always be” line of thinking. They are partially correct. St. Joe historically has not made the money it could because, in truth, it has been historically dismally run. One could easily argue the assets are so valuable they made money “in spite of” management not “because of”.

I am of the opinion that 577k continuous acres on the Florida panhandle are worth multiples of the $1800 an acre David Einhorn thinks they are. Just because prior management was unable to extract more value from it than that in no way means “that is all it is worth”. I think it is pretty clear that prior management was happy to collect a paycheck and trudge along.

All that being said we are also in the worst environment for RE since the ’90-’91 recession. To think anything RE related would not be severely affect is folly. From CRE [commercial real estate] to RRE [residential real estate], it all got hit. CRE has come back (its diverse revenue streams protect it vs. residential) and residential will also, in time.

So the question we need to answer is: Can Berkowitz unlock that value? In the short time he has “actively” been involved it seems he has done more to seek alternative solutions for the land than what the previous board did in the last ten years. Whether it be large outside investors, large scale JV’s or whatever, it is clear that alternatives are being discussed to take the area from simply a few planned communities to a larger more commercial development. The area has large rail, sea, highway and air infrastructure in place that gives it immediate access the the Southwest U.S., east coast, international air destinations and the Gulf of Mexico. That has value. The airport traffic is well ahead of schedule and already reports passengers in excess of the one it replaced.

The bears will say the same old thing, 'it is mosquito-filled raw land'. Right. Is there anywhere in Florida where there are trees and water that isn’t? Anywhere on the east coast for that matter? I can tell you the mosquitoes in Central MA suck in the summer but that has not killed land prices here. See, if it wasn’t raw land we would not be having this discussion because JOE would have developed it and the point would be moot. They will also say Berkowitz isn’t a CEO or a RE guy and therefore is out of his element. That may also be partially right and that is why he has no intention of running it but finding people who will and aligning their interests with shareholders.

I have yet to hear what I think is credible reasoning as to why that much land that is well located in Florida with even competent management won’t be worth a bunch in the future. And no, looking backwards at previous management and extrapolating that indefinitely into the future isn’t credible.

Credible reasons would be 500k acres are preservation land and have no value as they can never be developed, there is no rail or highway service, there is no airport, 300k acres are “Super Fund” sites filled with nuclear waste, etc. Not 'there are mosquitoes and trees there'. See the difference? This is the Florida panhandle here we are talking about, not Chernobyl, as the bears would have us believe.

Now I am sure due to the interest in this they will come out yelling and screaming. It’s ok, today’s bears/short will be tomorrow panicked buyers. Let them.

The absolute beauty of this is that either way, one side will be proven right over time (not today or tomorrow people… 'over time') and it will be fun all along the way.

Here is the other article.

Ehh…. Reminds me of when Buffett’s Berkshire Hathaway (NYSE:BRK.A) underperformed during the tech bubble. He was called all of the same things and investors said he “had lost it”. There are benign comments from a JOE short seller and some other managers that are 'concerned' that Bruce can’t concentrate. What they do not get is that because FAIRX is a mutual fund and not a hedge fund, there are certain restrictions as to what he can do with it.

Much was made on his sale of General Growth Properties (NYSE:GGP) stock earlier this year. As Berkowitz explained at the Harbor Investment Conference: Regulations say he can only hold 5% of assets in FAIRX in REIT’s, therefore the sale was partially determined by that- and that Brookfield Asset Management (NYSE:BAM) was a very interested buyer in his stake. It also makes us wonder if perhaps JOE converting some/all of itself into a REIT is in the cards down the road. Similar restrictions hold for debt instruments. Because of this, Berkowitz may be finding great value in the debt of companies he is buying stock in but cannot purchase it (he insinuated this in the article). Opening a credit-based fund make perfect sense in that scenario.

FAIRX investors ought to also take heart to know Berkowitz has $300M himself in the funds…

Disclosure: Long JOE